1QFY20 CNL of RM17.6m came in below expectations. We attribute the earning miss to: (i) lower-than-expected sales tonnage, and (ii) lower-than-expected manufacturing margin. Post result, we increased our FY20E and FY21E losses to RM60m and RM13m, respectively. Downgrade to UP with lower TP of RM0.550 (from RM0.580) based on forward P/BV of 0.26x (from 0.29x) pegged to FY20E BV/share.

Below expectations. Excluding one-off overhead cost for plant’s temporary shutdown (RM5.2m) and allowance for inventories written down (RM7.4m), Ann Joo recorded 1QFY20 CNL of RM17.6m which came in below our and consensus expectations. This was mainly due to: (i) lower-than-expected sales tonnage, and (ii) lower-than-expected manufacturing margin. No dividend was announced, as expected.

Results’ highlight. YoY, 3MFY20 recorded wider losses of RM17.6m compared to RM6.9m a year ago mainly due to: (i) lower sales tonnage for both domestic and export market as the business was partly affected by unexpected change in government and business closure due to implementation of MCO, and (ii) lower average selling price of various steel products. QoQ, the first quarter registered lower losses by 77% compared to RM77.8m in the preceding quarter largely due to: (i) rebound in average selling price from RM1,889/MT in 4QFY19 to RM2,046 in 1QFY20, and (ii) improvement in margin thanks to lower raw material cost since last quarter, despite lower sales tonnage in 1QFY20 compared to 4QFY19.

Outlook. Overall, we remain cautious with its prospects as we expect oversupply issue and softer domestic demand to continue to impact the steel industry, despite seeing some rebound in ASP lately. Besides, manufacturing margin could be further distressed by increased iron ore prices due to global supply chain disruption from Brazil and Australia influenced by Covid-19 outbreak. However, we are encouraged by the group’s strategy to actively pursue export opportunities, which may help in cushioning the negative impact from slower domestic demand and gaining tax incentive from increasing export. Moving forward, the company will focus on optimising operational efficiency and reducing cost to remain responsive to uncertain market changes.

Earnings revision. Post result, we increased our FY20E/FY21E losses to RM60m/RM13m, respectively, after adjusting our sales and margin assumptions in view of business disruption during MCO, depressed ASP and higher raw material cost due to supply disruption caused by outbreak of Covid-19.

Downgraded to UP with lower TP of RM0.550 (from RM0.580) based on Fwd P/BV of 0.26x (from 0.29x) pegged to FY20E BV/share, which is at -2SD level, we believe is justified due to: (i) depressed ASP of rebar steel, and (ii) weaker domestic and international demand.

Risks to our call include: (i) higher-than-expected steel prices, (ii) higher-than expected steel demand, and (iii) lower-than-expected raw material costs

Source: Kenanga Research - 1 Jul 2020